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Financial Companies Remuneration Act: further tightening of the remuneration rules for the financial sector

06 July 2020
Banking & Finance

Introduction

On 2 July 2020, the Secretary of Finance submitted the Bill on Further Remuneration Measures for Financial Enterprises (the “Bill”) to the Dutch Parliament for consideration.

The Bill introduces:

  • A statutory retention period of 5 years for, among other things, shares as part of the fixed remuneration package of directors and employees of financial companies;
  • A statutory obligation for financial companies to consider and report on its remuneration policy in relation to the company’s social function and how remuneration is determined; and
  • Tightening the possibility of deviating from the bonus cap in relation to the remuneration of persons not subject to the collective labor agreement for banks (CLA).

Among other things, the Bill leads to a number of changes in Chapter 1.7 of the Dutch Financial Supervision Act (Wet op het financieel toezicht, the “FSA”). In addition to the aforementioned amendments, a number of technical amendments to the FSA are proposed.

Where until now the statutory remuneration requirements as laid down in the FSA, which were based on the Dutch Financial Companies Remuneration Policy Act (Wet beloningsbeleid financiële ondernemingen, “Wbfo”), only relate to the variable part of the remuneration, the Bill introduces rules that relate to the fixed remuneration part.

Retention period for shares and comparable financial instruments as part of the fixed remuneration

The Bill will result in a statutory retention period of five years, which will be applicable to directors and employees from, amongst others, banks, payment service providers, investment firms and AIFMs receiving, as part of their fixed remuneration, shares in the capital of the financial company or similar financial instruments whereby the value of which depends on the value of the financial company (hereinafter jointly: shares).  As a result of the Bill such shares are required to be held for at least 5 years after acquisition and may not be sold in the interim.

The purpose of introducing a statutory retention period is to bring the interests of directors and employees more in line with the long-term interests of the financial company and to mitigate short-term risks. According to the Secretary of Finance, the possession of shares could have an unwanted effect if these are linked to short-term price increases.

The proposal to introduce a statutory retention period is in line with the Guidelines on a Controlled Remuneration Policy as published by the European Banking Authority (EBA) regarding a mandatory retention period when acquiring shares and comparable financial instruments in variable remuneration. The concept of a retention period is, as such, therefore not entirely new.

The statutory retention period will be included in art. 1:130 FSA (new) which article will read as follows:

SECTION 1.7.9. RETENTION PERIOD OF FINANCIAL INSTRUMENTS IN FIXED REWARDS

Article 1:130

A financial undertaking shall ensure that shares or other financial instruments, the value of which depends on the value of the company, form part of a fixed remuneration of a natural person working under its responsibility, for a period of at least 5 years after acquisitions are being held.”

It is important to note that the statutory retention period will not apply to shares that were already acquired before the end of the one-year transition period by employees who already worked for the financial company at the time of the entry into force of the statutory retention period. In practice, this means that shares that have already been transferred to existing employees do not fall within the scope of the Bill.

Mandatory consideration and reporting on remuneration in relation to the social function of financial company

The Bill introduces the obligation for financial companies to describe in their remuneration policy how the financial company takes account of the ratio of the remuneration of directors, supervisory directors and employees of the financial company in relation to its social function and the manner in which the remuneration is determined.

This new obligation will be embedded in a new sub e to be added to art. 1:118 paragraph 2 FSA which sub will read as follows:

e. how the remuneration within the company relates to the position of the company in the sector and the position in society, as well as the manner in which this relationship is established.

In addition, Section 1:119 FSA will be amended to implement the above.

If the financial company in question is obliged under the FSA to draw up a management report, it must account for this topic in public. Supervisors will monitor compliance with this obligation. However, a substantive review will not take place.

By introducing this new obligation, the legislator wants to ensure that prior to adopting a remuneration policy (and any adjustments thereof), the social function of the financial company will be taken into account in a more prominent manner. In this way, it should also become easier for stakeholders to address the responsible corporate bodies within an organization in relation to the remuneration policy.

Tightening the possibility of deviating from the bonus cap in relation to the remuneration of persons not subject to the CLA.

Pursuant to the implemented Wbfo  a financial company may in exceptional cases deviate from the rules with regard to the bonus cap for employees not subject to the CLA. In practice, however, it appears that this option is being misused and it is therefore considered necessary to introduce stricter rules.

In order to emphasize that the option to deviate from the bonus cap with regard to variable remuneration may only be used in exceptional cases, the Bill excludes this option for the remuneration of persons who (a) perform internal control functions or (b) engage directly in the provision of financial services to consumers. In order to better monitor how much use is made of the possibility to deviate from the bonus cap, an annual notification obligation will apply to financial companies. They must provide their supervisor annually with information regarding the use of the option to deviate from the bonus cap. This follows from a new paragraph 4 to be inserted in art. 1:120 FSA.

The obligations with regard to deviating from the bonus cap will further laid down in art. 1:121 FSA.

Transition period

The Bill is scheduled o become effective as per the 1st of July 2021, but only where it concerns the provisions regarding the statutory retention period and tightening the possibility of deviating from the bonus cap in relation to the remuneration of persons not subject to the CLA.

With regard to the tightening of the deviation from the bonus cap, a transition period of one year will apply from the moment of entry into force of the Bill with regard to natural persons who already work under the responsibility of the financial company at the time of entry into force of the Bill. During this transition year, the financial company will have to revise the terms of employment and contractual agreements.

The same will apply with regard to the introduction of the statutory retention period, these rules will apply from 1 July 2022 to natural persons who were already employed by the financial company on 1 July 2021. Of course with due observance of the provision that already acquired shares fall outside the scope of the statutory retention period.

The mandatory consideration and reporting of remuneration in relation to social function of the financial company will take effect one year later. This means that as of July 1, 2022, financial companies must comply with the new obligation and adjust their remuneration policy accordingly. Those financial companies that have to publish an annual management report will have to report on this topic in the management report for the financial year 2022.

The Ploum Banking & Finance team will keep you informed of further developments regarding the Bill. For questions and/or information, please contact Matthijs Bolkenstein (m.bolkenstein@ploum.nl or +31 6 46630866) or Lucas Lustermans (l.lustermans@ploum.nl or +31 6 1985 0096).